Legal challenges in the hotel industry

Hotel owners and their attorneys need to be on top of an unending number of legal issues on a day-to-day basis.

During the “Non-Labor Legal Issues in Hotel Operations” session of the Americas Lodging Investment Summit Law conference, a group of hoteliers and attorneys addressed some of the ongoing issues facing the hotel industry today.

The bottom line
Aligning the interests of the operator with the owner is much easier when the hotel isn’t managed by the brand, said Bill Tennis, EVP, general counsel and corporate secretary at DiamondRock Hospitality Group.

“When we talk about brand-managed (hotels), it’s entirely different,” he said. “Understandably, it’s because the brand is more worried about preserving the brand standards throughout. It’s a constant battle responding to the brands.”

The brands’ requests for additional funding into hotels are the source of regular negotiations, he said. There’s never 100% alignment unless the owner decides to put all the money in, he said. The management agreement might say one thing, he said, but how much exactly is the owner going to invest? It matters how rigid the brand standards are, he said.

DiamondRock has a team that looks at how capital is spent to determine which projects are a priority and how much to invest in those, he said.

“Management companies ask for the world, and we’ll typically cut it back,” he said. “Most times, we reach an agreement.”

It’s easier to reach an understanding on investment with independent management companies because they don’t have a brand they’re trying to maintain, he said.

It’s common for owners to ask the brands to put up some funding through key money, said Maki Bara, president and co-founder of The Chartres Lodging Group.

“Unfortunately, a couple of trends we’ve been seeing the past couple of cycles are not great for owners,” she said. “Amortization schedules have gotten much longer. I was used to key money burning off after 10 years. If a brand is terminated in year seven, that’s only three years’ worth of amortized key money. Now it’s 20 years or longer.”

Chartres Lodging is an opportunistic investor, she said, so it asks for flexibility upon a sale in year five, six or seven. That still leaves a chunk of unamortized key money left, she said, and there’s a contingent liability to account for.

What she’s seeing now is that companies that terminate brand contracts—for any reason, even when there’s cause to do so—still owe unamortized key money, she said.

“It’s going more and more in favor of the big brands,” she said. “We’re seeing less competition among the big brands.”